The US Justice Department is investigating potential collusion among investors in collateralized loan obligations during the transition away from Libor. Subpoenas have been sent to financial firms in New York as prosecutors look into whether investors coordinated actions to benefit from the change in benchmarks.

As companies rushed to switch benchmarks on their debt, CLO managers observed how some could benefit from excluding adjustments, impacting the interest companies paid and potentially affecting CLO equity holders. Prosecutors are reviewing communications between equity holders around the transition deadline to determine if there was collusion for financial gain.

CLO equity investors were at risk during the transition due to their returns depending on excess cash flows after higher-ranking debt holders are paid. Antitrust laws prohibit competitors from colluding for economic gain, potentially making it illegal for CLO investors to agree on financial terms. Prosecutors are investigating whether there was agreement on investment terms.

In criminal collusion cases, prosecutors must show evidence of an agreement without needing to prove economic harm. If charges are brought, the government would need to convince a jury that collusion occurred. The investigation is ongoing, and the Justice Department declined to comment on the matter.

Read more at Yahoo Finance: DOJ Probing for Collusion in CLO Market During Libor Transition